EUR/USD. Weekly review. Hawkish Fed minutes, strong US data, and China again
August 21, 2023 3:22 am
The EUR/USD pair ended the trading week at 1.0872, 80 points below the opening price (1.0952). Looking at the weekly chart, we can see that the pair has been in a clearly defined downtrend since mid-July, falling for the fifth consecutive week. The week before last, EUR/USD buyers tried to seize the initiative after the mixed US Consumer Price Index data. However, after the price jumped to 1.1062, traders mass-fixed their profits, as if doubting the prospects for the development of the upward movement. The dollar not only withstood the blow but also strengthened its position, especially after another inflation report (Producer Price Index). The latest “Federal Reserve minutes” only added to the fundamental picture, allowing the bears to test the support level of 1.0850 (the lower line of the Bollinger Bands indicator on the daily chart).
In general, the economic calendar for the past week was not filled with important events. The minutes of the July Fed meeting became, by and large, the main agenda of the week. The document turned out to be on the greenback’s side – most members of the Committee still consider inflation to be the main risk. At the same time, they point to stable economic activity and a strong labor market. Most officials in the meeting agreed that another rate hike would be possible (and necessary) “in the absence of a strong (active) decline in inflation, which is forecast by the central bank.”
Take note that, unfortunately, many circumstances are not mentioned in the minutes that would help to understand the balance of power in the Fed. For example, we do not know how many members of the Committee (and who exactly) supported one or another opinion. Therefore, market participants have to draw independent conclusions based on the designations used by the Fed. In this case, the wording used was hawkish – the document states that “most” members of the Fed are still concerned about inflation and are ready to support further tightening of monetary policy. According to Fed officials, “the appropriate decision will depend on the totality of the data that will be received in the coming months.” Considering the rhetoric of the minutes, it can be assumed that most of the participants in the meeting came to this conclusion.
It is noteworthy that after the Fed minutes, the chances of an interest rate hike at the September meeting did not strengthen: according to the CME FedWatch Tool, the chances of such a scenario being realized are only 11% (before the minutes it was at 8%). While the chances of a rate hike in November has increased to 33%.
Reacting to the minutes of the July meeting, the EUR/USD pair settled in the area of the 8th figure.
All other economic reports last week were also (mostly) on the sellers’ side. For example, business sentiment indices in Germany and the eurozone as a whole (from the ZEW Institute) remained in the negative zone, reflecting the predominance of pessimism in the European business environment. While the US retail trade report was in the “green” – in particular, the volume of sales excluding automobiles increased by 1.0% (with a forecast of growth of 0.4%). This is the best result since January 2023.
Another indicator also pleased the dollar bulls: US industrial output. It grew by 1.0% in July, with a forecast of growth of 0.3% (while in the previous two months, the indicator was in negative territory). The Philadelphia Fed Manufacturing Activity Index also moved into the “green.” In August, this indicator rose to 12 points – this is the best result since April 2022. For the first time in the last 11 months, the index rose above zero.
However, the dollar strengthened its position last week not only due to strong data. The increase in risk-off sentiment also contributed. Here, China came to the fore again – unfortunately, in a negative context. After disappointing data in the field of foreign trade, China published data on the volume of retail sales and industrial production. All components of the reports were in the “red.”
In addition, we found out that one of China’s largest developers, Evergrande, filed for bankruptcy and protection from creditors in the US. This is a continuation of the process of restructuring the company’s billions of dollars in debt. Recall that at the end of 2021, Evergrande defaulted on its dollar debts, leading to a crisis in the entire real estate sector of China and triggering a “domino” of defaults by industry companies. Several other major developers (Kaisa, Fantasia, and Shimao Group) have also defaulted on their debts.
The step taken last week should protect Evergrande’s American assets from creditors while the company works on a restructuring deal in other countries (the total debt is estimated at around $300 billion). Reacting to this news, the Hong Kong Hang Seng index fell by 2% on Friday, and the Shanghai Composite index dropped by almost 1%.
Thus, after “12 rounds,” the overall score is in favor of the US currency. The current fundamental background contributes to a further decline in the pair, primarily due to the dollar’ broad strength. However, it is worth noting that despite the bearish sentiment on the pair, sellers were unable to settle below the 1.0850 target (the lower line of the Bollinger Bands indicator on the daily chart), although they did test this resistance level. In my opinion, short positions on the pair are only appropriate after overcoming this price barrier. In this case, the next bearish target will be the psychologically important level of 1.0800.
The material has been provided by InstaForex Company – www.instaforex.com
The EUR/USD pair ended the trading week at 1.0872, 80 points below the opening price (1.0952). Looking at the weekly chart, we can see that the pair has been in a clearly defined downtrend since mid-July, falling for the fifth consecutive week. The week before last, EUR/USD buyers tried to seize the initiative after the mixed US Consumer Price Index data. However, after the price jumped to 1.1062, traders mass-fixed their profits, as if doubting the prospects for the development of the upward movement. The dollar not only withstood the blow but also strengthened its position, especially after another inflation report (Producer Price Index). The latest “Federal Reserve minutes” only added to the fundamental picture, allowing the bears to test the support level of 1.0850 (the lower line of the Bollinger Bands indicator on the daily chart).
In general, the economic calendar for the past week was not filled with important events. The minutes of the July Fed meeting became, by and large, the main agenda of the week. The document turned out to be on the greenback’s side – most members of the Committee still consider inflation to be the main risk. At the same time, they point to stable economic activity and a strong labor market. Most officials in the meeting agreed that another rate hike would be possible (and necessary) “in the absence of a strong (active) decline in inflation, which is forecast by the central bank.”
Take note that, unfortunately, many circumstances are not mentioned in the minutes that would help to understand the balance of power in the Fed. For example, we do not know how many members of the Committee (and who exactly) supported one or another opinion. Therefore, market participants have to draw independent conclusions based on the designations used by the Fed. In this case, the wording used was hawkish – the document states that “most” members of the Fed are still concerned about inflation and are ready to support further tightening of monetary policy. According to Fed officials, “the appropriate decision will depend on the totality of the data that will be received in the coming months.” Considering the rhetoric of the minutes, it can be assumed that most of the participants in the meeting came to this conclusion.
It is noteworthy that after the Fed minutes, the chances of an interest rate hike at the September meeting did not strengthen: according to the CME FedWatch Tool, the chances of such a scenario being realized are only 11% (before the minutes it was at 8%). While the chances of a rate hike in November has increased to 33%.
Reacting to the minutes of the July meeting, the EUR/USD pair settled in the area of the 8th figure.
All other economic reports last week were also (mostly) on the sellers’ side. For example, business sentiment indices in Germany and the eurozone as a whole (from the ZEW Institute) remained in the negative zone, reflecting the predominance of pessimism in the European business environment. While the US retail trade report was in the “green” – in particular, the volume of sales excluding automobiles increased by 1.0% (with a forecast of growth of 0.4%). This is the best result since January 2023.
Another indicator also pleased the dollar bulls: US industrial output. It grew by 1.0% in July, with a forecast of growth of 0.3% (while in the previous two months, the indicator was in negative territory). The Philadelphia Fed Manufacturing Activity Index also moved into the “green.” In August, this indicator rose to 12 points – this is the best result since April 2022. For the first time in the last 11 months, the index rose above zero.
However, the dollar strengthened its position last week not only due to strong data. The increase in risk-off sentiment also contributed. Here, China came to the fore again – unfortunately, in a negative context. After disappointing data in the field of foreign trade, China published data on the volume of retail sales and industrial production. All components of the reports were in the “red.”
In addition, we found out that one of China’s largest developers, Evergrande, filed for bankruptcy and protection from creditors in the US. This is a continuation of the process of restructuring the company’s billions of dollars in debt. Recall that at the end of 2021, Evergrande defaulted on its dollar debts, leading to a crisis in the entire real estate sector of China and triggering a “domino” of defaults by industry companies. Several other major developers (Kaisa, Fantasia, and Shimao Group) have also defaulted on their debts.
The step taken last week should protect Evergrande’s American assets from creditors while the company works on a restructuring deal in other countries (the total debt is estimated at around $300 billion). Reacting to this news, the Hong Kong Hang Seng index fell by 2% on Friday, and the Shanghai Composite index dropped by almost 1%.
Thus, after “12 rounds,” the overall score is in favor of the US currency. The current fundamental background contributes to a further decline in the pair, primarily due to the dollar’ broad strength. However, it is worth noting that despite the bearish sentiment on the pair, sellers were unable to settle below the 1.0850 target (the lower line of the Bollinger Bands indicator on the daily chart), although they did test this resistance level. In my opinion, short positions on the pair are only appropriate after overcoming this price barrier. In this case, the next bearish target will be the psychologically important level of 1.0800.
The material has been provided by InstaForex Company – www.instaforex.com
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